Likonomics: the way ahead

From China's turbulent capital market last week, the most significant thing to watch is the rise of Likonomics (which China Daily first reported as Li-economics), a word coined by Barclays Capital during the turbulent past week, to describe China's economic scenario likely to be pursued by the cabinet led by Premier Li Keqiang.

No stimulus, de-leveraging and structural reform are identified as the three key components of Likonomics, meaning, in a nutshell, trading the economy's short-term pain for long-term gain.

If it proves workable, it may be seen as a mini-crisis on a controlled scale, engineered by the government's visible hand, to divert from the likelihood of a more serious crisis that would otherwise be inevitable if things are left entirely to be decided by the invisible hand of market forces.

But Li Keqiang's hand, so to speak, is not the only visible hand. There have been many visible hands, from various local governments and large corporations, vying for more money and more resources in the name of more growth - which may in effect create more long-term risks.

A credit-driven growth cycle can only be short-lived, a fact that is simple economics. So, this time, China's visible hand is likely to work as regulation within the market, instead of against the market. It is an effort that is likely to succeed.

In the past few years, the single-minded pursuit of high GDP growth, especially when the US and Europe were in recession, has left in its wake many ambitious but as yet unfinished public projects and a mountain of debt, incurred by local governments and large corporations.

The gap between investors' ambitions and market realities is easily spotted in many places in China - and more easily in the second- and third-tier cities, as well as in counties and towns. They feature giant government and bank powers, vast empty industrial parks and development plans worthy of science fiction.

Local government debt, the size of which is widely speculated to be in the trillions of yuan, is but one result of the over-heated credit expansion. It has caused many structural imbalances in society.

Beginning from last year, the central government changed its tune and began telling society that easy credit is not going to last - both in size and in its outdated housing- and manufacturing-oriented business models. But this remained a mere piece of advice and was not heeded by people who had already developed an interest in the old ways of finance.

The intervention of the government's visible hand, or what is now called Likonomics, has therefore become essential. If the country keeps growing like before and adding new wasteful projects to the old ones, it would be certain to run into, not far from now, an abysmal financial situation only the US sub-prime debt crisis could match.

Andy Xie, a former Morgan Stanley Asia-Pacific economist, said this could occur two to three years from now.

Sensible investors like Likonomics and hope it will work because it is the only way to support sustainable growth and to protect the general investors' interest in China's future.

From a meeting of the National People's Congress Standing Committee during the weekend, rising criticism was reported of "some" local governments blindly chasing physical investment in their urbanization plans.

Also, during the weekend, at the Lujiazui Forum in Shanghai, Shang Fulin, chief of the China Banking Regulatory Commission, hinted more policies were being prepared (likely to be launched soon) to allow private capital to take a bigger role in the reform of the banking industry.